| Interview: Joe Hurley |
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Avoiding money mistakes
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What are some of the common misunderstandings about 529 plans? |
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Understanding 529 plans |
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 One is that your choice of 529 plan in some way influences or determines where your child has to go to college. It doesn't make any difference with 529 savings plans.
Another misconception is that 529 plans
are going to dramatically reduce your eligibility
for financial aid. In fact, they're no worse than
other types of investments and they're treated better
than certain types of investments. If you put money
in your child's name in a mutual fund, it counts heavily
against financial aid eligibility. But if you put
money in your child's name in a 529 plan and your
child applies for aid as a dependent, it's not counted
at all under current rules. If it's in your name as
a parent, then it's going to be counted at a low rate
in eligibility. A parent owning a 529 account is treated
the same as a parent owning a mutual fund that's set
aside for college. A 529 plan owned by the student
is excluded entirely, whereas a mutual fund owned
by the student is counted heavily.
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Should the account be in the student's name? |
That's
a good question. Generally I say no, because the advantage
to keeping it in the parent's name is that the parent
always has control and ownership over the money and
doesn't have to give it up when the student reaches
age 18 or 21 years old. Because parents' money isn't
counted heavily anyway, it's not hurting financial
aid that much.
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What mistakes do people make with 529 plans? |
“You can use any state's 529 and your child can go to any school.”
One mistake is not recognizing the gift tax consequences
if they're putting in large amounts. These contributions
must be treated as gifts to the beneficiary, and you
only have a $12,000 annual exclusion to cover all of
your gifts, whether they're 529 contributions or gifts
of cash or stock to a child. That's a limit on large
contributions, but most families aren't making that
size contributions each year so it's not really an issue.
The other mistake is people who don't understand their state tax benefit and the availability of a benefit when they're choosing the 529 plan. Some people will assume they will get that state tax deduction if they invest in any 529 plan, when most states require that you invest only in the in-state 529 plan to get that deduction.
| -- Posted: Sept. 17, 2007 |
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